Main menu

Post navigation

Will Japan be the first country to have negative official interest rates?

Often these days I find that the themes of this blog come together as a job lot rather than singly which I take as a compliment. One of my contentions over the past 18 months or so is that negative interest-rates and bond yields are spreading and we will be seeing more and more of them as time progresses. Regular readers will recall that I took this message to the Reform think tank last September and may also be interested to know that “think tank” is now in my financial lexicon. Meanwhile in the land of the rising sun or Nippon there has been a further development.

Let me illustrate from a speech by the head of the Japanese LDP Shinzo Abe.

We want to conduct monetary policy boldly, by taking into account the possibility of revising the Bank of Japan Act

Some care is needed here as “bold action” from Japanese politicians and officials is in my financial lexicon but revising the central banks legal structure had my antennae on full alert.Then Abe san explained. From the Japan Daily Press.

Shinzo Abe, the leader of the opposing Liberal Democratic Party (LDP) and most likely next Japanese Prime Minister, made a statement on Thursday that he wants the Bank of Japan to encourage lending by setting its interest rates to zero or sub-zero.

He has also called for “unlimited” monetary easing from the Bank of Japan which is an interesting concept for an organisation that is in the middle of so-called Quantitative Easing number 9 which replaced the former QE8 after only about six weeks. Apparently the extra 11 trillion Yen represented by QE 9 is not enough for Abe san who has called it “meaningless”. No wonder he also wants to change the Bank of Japan Act!

However he was not finished as Abe san also added this according to the Financial Times.

the central bank and government should agree on an inflation target of perhaps 2 or 3 per cent.

So we end up with something of a concerted plan which goes as follows. To escape the ( so far two) Lost Decades that Japan has suffered Abe san feels that she needs higher inflation (currently the Bank of Japan is aiming at 1%) which he feels will require both negative interest-rates and unlimited QE.

Put another way we are now on the ground of one of my other themes which is that proponents of extraordinary monetary measures will in extremis -a situation they invariably find themselves in sooner or later, usually sooner- take the “More,More,More” route.

Put another way these are the sort of policies that might have come out of the mouth of the Japanese economist Richard Koo. He is treated by so many people as near to an economic saint which might lead the unwary into thinking that his policies must have been tried and found to have worked! As I have not yet actually heard Mr.Koo approve I will call the plan Koo-like as his view on such matters was summarised in my view some years ago by Luther Vandross.

never too much, never too much, never too much

How did we get here?

The years since 1990 have been difficult for Japan but she also has strengths and the debate has raged as to how well or badly she has done. However the Great Eastern Earthquake of last March gave those wanted more of a fiscal stimulus at least some of what they wanted and led some to predict that her economy would then pick up. However on Monday we learnt this.

Japan’s Gross Domestic Product had fallen by 0.9% in the third quarter of 2012 compared to its predecessor and it was only 0.1% higher than a year ago. Those trouble by her domestic demand issues which include me so little respite in private consumption falling by 0.5%. To continue the Talking Heads quotes “same as it ever was”. However even more worrying was the fact that exports had fallen by 5% on the previous quarter. Whilst the islands dispute with China will have influenced this it was still a large drop. We can also add in that there was still some evidence of fiscal action as public investment was 4% higher than in the previous quarter.

What has happened since?

Japan’s Cabinet Office calculates a consumer confidence index which since the third quarter ended has fallen (from 40.4 in September to 39.7 in October on the unadjusted series). Also the machine tools orders index fell by 6.7% in October on a year earlier. This is a number which is closely watched due to fact that we receive it early and also due to the fact that it gives us a guide as to what developments we can expect from Japan’s manufacturing sector. With Japanese industrial production having slumped by 8.1% in September compared to the same month in 2011 this is an even more moot point than usual.

What about surveys?

The Markit Purchasing Managers Index told us this.

In contrast, manufacturing output declined to the sharpest degree for 18 months as volumes of incoming new orders fell at a marked pace. The Composite Output Index (covering manufacturing and services) therefore continued to post below the 50.0 no-change mark and signalled a modest rate of contraction. The index registered 48.9, up from a reading of 48.4 in September.

So as you can see there was still a slowdown albeit at a reduced pace.

Comment

There are a lot of issues here but if we stop for a moment and consider whether they are likely to build we see that they are as there is little sign of any improvement in the economic outlook in Japan. Also the LDP is by no means guaranteed to win the Japanese election. But over the credit crunch we have found that suggestions of further easing tend by a process of osmosis seep through a political class over time. It would also appear that financial markets are of the same view as the Yen has weakened against the US dollar since the pronouncements were made and is now at 81.12. Also the Japanese stock market has had a good couple of days in response to this and has got back above the 9000 level on the Nikkei 225 at a time when other stock markets have fallen.

Let me give you some thoughts on the likely outcome.

Can Japan raise her inflation rate to a 2-3% range?

This is an often much misunderstood debate as the Bank of Japan has in recent times reaffirmed its commitment to a 1% inflation rate and beefed up its efforts to achieve it as I have described above. However it is failing to make any real progress. So a plan to hit a 2% or more target would to my mind involve a real surge in QE and official interest rates pushed below zero too, possibly significantly so. One more time Japan’s economy will become the world’s crash test dummy.

What will this mean for the Bank of Japan’s independence?

It will not have any. This may provoke a wry smile as for many years it was not considered to have any but one of the changes of the credit crunch era has been that at times it has resisted political pressure. Furthermore I read quite a bit into the words of Deputy Governor Nishimura.

and in its maturity has come to fit itself perfectly to the new age.

He was in literal terms discussing the architecture of the Bank of Japan’s main building but I think we can translate the code.

Oh and it will probably lead to one more change as one of the curious implications of the credit crunch era is that it is the nations who have central banks buying their own countries bonds who have not have negative bond yields! Quite contrary in a way is it not? I am excluding Switzerland because she is buying other countries bonds. But as I consider Japan’s “currency twin” I can only shake my head at a ten-year government bond yield of 0.45% and wonder if it may yet be a race between the currency twins as to who takes their countries official interest rates into the negative zone.

And once one of them decides “To boldly go where no one has gone before” to use a famous phrase, how long do readers think it will be before we join them?

Just for the avoidance of doubt I am discussing negative interest rates acrosss the board as opposed to taxes which mimic that effect or rates just for foreign players.

Actually part of the LDP plan is to do exactly the reverse. The current governments plan is to raise the sales tax to 10% to help with the fiscal deficit. This would boost the inflation rate (for example Spain in spite of its crisis has CPI over 3% mostly because of VAT rises) and help with the inflation target. I covered this a while back.

Hi Shaun
I was looking at pictures the other day of the Japanese Navy with some of the most advanced warships on earth, and the building of many aircraft carriers. But of course it must have been a myth as Japan does not have a Navy!
Fiddling a few economic indicators is surely childs play in comparison.
By the way, that ‘mythological’ Navy and that of the Chinese are in close proximity, not a positive situation.
I commented further on France in reply to you yesterday.

Thank you I have just looked that up. Unfortunately the Maritime Self Defence Force website is a little light on such details so I have looked it up elsewhere. Here for others is an interesting view.

“This program was initially known as the “13,500-ton” helicopter destroyer (DDH). The Defense Agency formally refers to them as the DDH (helicopter destroyer) follow-on mode. It is temporizing to refer to this type of vessel as a DD (destroyer). There had never been a destroyer that exceeded 10,000 tons. In fact, with a full displacement of about 20,000 tons when equipment fuel, water and weapons are counted in, they essentially can be classified as light aircraft carriers”

Mind you the Royal Navy did the same with the Invincible class which were called through deck cruisers originally…

Also I did find this on the official website which echoes down the years.

“Japan lacks natural resources, so it must rely on countries overseas for most of the materials that we require in our daily lives”

We Japan’s debt to GDP ratio they really are leading the way and will they end up as a zombie country? With debts that can never be paid back, an aging and falling population, a high cost base, very few natural resources, declining manufacturing base and the final killer for energy intensive industries, high and noncompetitive energy prices compared to US shale oil and gas.

The US shale gas industry is a real game changer, which is why I feel that the US over the next 5 years will power ahead. US heavy industry is investing over $30bn in new plant in the US. BASF and Japanese heavy industry have said they can’t compete on production costs due to low US energy prices with ‘onshoring’ of industries back to the US gaining momentum.

The US is still the world leader in receiving foreign investment.

Japans miracle was based upon advanced production techniques, cheap reliable mass manufacturing and good quality, reliable products. Their problem is the they are being out Japaned by the Asian tigers with Korean manufacturers now beginning to dominate the traditional Japanese industries of industrial and consumer electronics with Samsung and LG and car making with Hyundai and Kia.

Other lower cost competitors are China, Korea, Taiwan, Thailand, Malaysia, India and Vietnam. Where Japanese manufacturers have offshored to remain competitive on price, they seem to be losing their edge on innovation none of the leading smart phones are Japanese, the best selling games console is the US Xbox 360, Triumph, BMW and Ducati motorbikes have gained market share at the Japanese expense, Sony are no longer the leading TV manufacturer, these are just a few examples.

Japan and the Western nations need to reinvent themselves in this increasingly globalized world. Shale oil and gas, will be the US get out of jail free card, Canada’s will be tar sand and a low tax base, Australia’s natural resources. Maybe shale oil and gas for the UK (politics allowing) and mass manufacturing for Germany and their various specializations for the other Northern European countries. For Japan and Southern Europe I can’t see one with their present structures.

We will have to see whether these measures are actually implemented and when it happens. The record so far is that once such a suggestion is made it then does appear the only doubt being timing…

One area that has already moved in Japan’s favour has been the exchange rate. I mentioned it moving above 81 versus the US Dollar and it also moved to 103.50 versus the Euro. More of that and they may get the inflation they are targeting! Of course then they may discover that they do not want it…

Kyle Bass with his famous trade must be wondering if this is the time. It has a fair bit of catching up to do before it can make a return.

You relate, I am discussing negative interest rates acrosss the board as opposed to taxes which mimic that effect or rates just for foreign players.

This is a very much needed discussion.

Japanese Banks, SHG, MFG, MTU, and SMFG, are driving Japan, EWJ, lower from September 14, 2012, as is seen in this Yahoo Finance Chart, http://tinyurl.com/d3cb8bjand Brazil Banks, BSBR, ITUB, and BBD, are driving Brazil, BRF, EWZS, EWZ, lower, as is seen in this ongoing Yahoo Finance Chart http://tinyurl.com/cd7rtnu

Hi Shaun,
The UK never leads anything. So, first the BOE and the Government (one and the same these days!) will watch the unfolding crisis in other countries as they go for negative interest rates and their economies implode. Then, after about 10 years cogitating on the escalating debacle, as they did with Japan, or was it 20 years? They will decide to join in as every one else is doing it so it must be right, right?

I agree that the Bank of England has been very resistant to reducing base rates below 0.5% which is odd if you consider their stated objectives. However as I feel that we are in a liquidity trap I welcome it as it is my opinion that no salvation is to be found for the UK in further interest-rate cuts.

But I suspect they will change their mind and a lot sooner than ten years. If you want a 20 year timetable then I think that was when I saw Roxy Music live.